Furnishing Success: How Homestar Uses Flexible Financing to Traverse COVID-19

In a Q&A for Commercial Factor, Leigh Lones of Rosenthal & Rosenthal spoke with Mark Phanco, COO of Homestar, about the challenges (and successes) the furniture distributor has faced during the COVID-19 pandemic and why flexible financing such as factoring has been important in keeping business on track.

BY LEIGH LONES

No one predicted how catastrophic and far-reaching COVID-19 would be when it hit in early 2020. There was not a business, industry or region in the world immune to COVID19’s outsized impact. No business owner was prepared to deal with the hurdles, setbacks and business disruptions that ensued, including months of lost sales, backlogged inventory and increasingly complex supply chain challenges. The companies that have weathered the storm thus far have demonstrated their tenacity and adaptability, even under the most challenging of circumstances.

Homestar Corporation, a ready-to-assemble furniture company, is one such standout business that has displayed exceptional resiliency throughout this turbulent period. Leigh Lones, SVP and Southeast region sales manager at Rosenthal & Rosenthal, spoke with Homestar COO Mark Phanco about growing a business during a global pandemic, pivoting to meet unexpected demand and why flexible financing is a must.

LONES: Homestar has a fascinating back story. Only a decade old, the company is headquartered in China with offices across Europe, Asia and the U.S. Over the years, Homestar has taken steps to expand its presence across North America. Initially, this growth stemmed from your U.S. manufacturing facility, which Ashley Furniture acquired in 2019. Most recently, the company has seen significant growth from your skyrocketing e-commerce sales with large domestic retailers. How has your business fared in recent months and what are some of the biggest challenges that you’ve faced?

PHANCO: COVID-19 has obviously created a unique set of circumstances for every business and especially for Homestar. There’s of course the critical mass piece, namely how to sustain a business when the world around you turns upside down. Our strong management team and the support we receive from Rosenthal has positioned us well and we’ve been fortunate to continue to move our business forward, even when other companies have struggled to do so.

The other unexpected byproduct of the pandemic is that furniture became a necessity for many consumers. The home office category, as one example, which had traditionally been a small piece of the business over the last 10 years — less than 1% — is now booming. All of a sudden, everyone needed a home office.

This created a good problem for Homestar. Demand was high, e-commerce orders flooded in from retailers and inventory flowed without issue from China. The products had already been manufactured in China before the Chinese New Year, so they were simply put on a boat and sent to the U.S. to be sold, which kept us a step ahead of many domestic manufacturers. While many companies experienced supply chain disruptions, we were able to get our furniture directly into the hands of our retail customers more quickly because our furniture was pre-assembled overseas.

One major hurdle we faced early on, however, was that most of our employees were under stay-at-home orders like so many other people around the country. So, while our customer service was on the mark, we couldn’t get products on the trucks and delivered to customers as quickly as we had wanted to. A couple of our large retailers needed their orders filled so urgently that they actually prepared letters from their CEOs deeming Homestar an essential business. Their support and confidence in us helped to get Homestar up and running again at full capacity.

LONES: It seems like the stars were really aligned for Homestar, specifically the timing of the sale of the company’s U.S. manufacturing business in 2019, which was key in helping Homestar refocus on e-commerce. How did that shift away from a manufacturing model to a solely e-commerce model work in your favor?

PHANCO: Our owner, Steve Lu, deserves credit for having the vision to not only maintain a U.S. presence but also to grow our footprint here, even after the sale to Ashley Furniture. We were hyper-focused on what the U.S. market’s needs were and how we could help to meet them. We knew the customer had changed and that we were now serving a primarily younger consumer base that was more accustomed to buying furniture online than in stores — a completely different buying experience than when I was buying furniture for my first home years ago.

We were lucky to find an acquisition partner in Dallas and built a drop-ship distribution center right smack in the center of the country so we could move products quickly to customers from coast to coast. The acquisition was a great one for us and accelerated our e-commerce operations by almost six months.

We knew if we were going to grow in the way that our owner had envisioned, we would need a lending partner that would grow with us and keep us charging ahead. Instead of needing funding for manufacturing, we looked to Rosenthal for inventory financing to ensure that our product continued to flow from China to our customers without interruption.

LONES: The pandemic has exposed many weaknesses and vulnerabilities in certain sectors and has caused major disruption across the credit markets. With credit coverage significantly restricted, how have these changes affected the furniture industry and your own business?

PHANCO: What’s happening right now in the credit markets is like nothing we’ve ever seen before. It’s hit businesses and consumers alike. On the consumer side, you could see the impact reflected in the shift in demand for our products. Interestingly, our highest furniture sales are historically right after tax season. People typically go out and buy houses, cars and furniture. So there was a real concern, especially among suppliers, about what would happen when the IRS delayed the tax filing deadline in April. But then the stimulus checks went out and we saw an almost immediate spike in furniture sales. For suppliers, things began to tighten up on the inventory side because of payment delays from big retailers. Some had money but no inventory, others had inventory but limited funds. Everyone was starving for sales.

Credit restrictions have changed the way we do business. Many factories have modified their expectations for payment. If you want more favorable terms, it takes a strong balance sheet and access to funding.

Whether it’s inventory financing or receivables financing, the right lending relationship can give a business flexibility as well as help navigating supplier relationships, supply chain challenges and shifting payment terms. We’ve also been able to pay our obligations to suppliers and tap into working capital to run our business.

LONES: Most people know Homestar as a furniture company. But Homestar also has a booming medical products business. With PPE in high demand because of COVID-19, how did you mobilize to meet the urgent needs of your customers?

PHANCO: As was the case when we made the decision to refocus our furniture business on e-commerce, our owner had the foresight to get into the medical products business at just the right time. We already had the customer base: the same large retailers who purchased our furniture. And when COVID hit in March, we knew there would be incredible demand for PPE for consumers and medical professionals alike. We worked quickly to find the right factories in China that were producing only the highest quality products. But there were many new hurdles to jump through, and most pressing were the prepayment requirements from freight companies to ship product overseas.

LONES: So many companies right now are struggling with more stringent supplier demands, prepayment requirements and other restrictions that can either slow down or jeopardize customer orders entirely. Homestar is already well-positioned in China and you have strong relationships with suppliers and manufacturers. How did that factor in?

PHANCO: It was almost a perfect storm. PPE, digital thermometers and other medical products fit right into our wheelhouse, mostly due to the relationships we already had with suppliers and manufacturers across Asia. That, coupled with intense demand from our existing U.S. retail customers, made it clear that this could be a significant growth opportunity for Homestar. Thankfully, we’ve been able to keep up the incredible momentum we were experiencing with our core business — furniture — while also having flexibility to grow in another sector.

LONES: How does your approach differ when thinking about financing a startup brand versus a more established brand? What are some of the key factors that help you decide whether to give up equity or explore alternative financing solutions like factoring?

PHANCO: Being able to shift gears, adapt quickly to meet demand and pursue opportunities is really the name of the game. Having flexible financing solutions like inventory financing and receivables financing has actually allowed us to get back into the manufacturing business in the U.S. — but this time for PPE, not furniture. It’s looking more and more likely that the U.S. could become a mask-wearing culture ... and with so many retailers and industries starved for PPE, we see a real opportunity. We know that many of our retail customers would prefer to buy “Made in the USA” PPE so that is our new focus. We wouldn’t have been able to do that as successfully had we gone down the path of giving up equity. •